UBS recently stated that the strong rise in the U.S. stock market in August 2025 was mainly driven by EPS revisions. However, with the advent of September – the most negative seasonal month in the history of the S&P 500 – the market faced a turning point. The bank warned that although the economic data showed no signs of slowing down, excessive positions and reliance on the Federal Reserve policy made the market vulnerable, and investors needed to be wary of systemic risks.
The strongest wave of EPS revisions since the COVID-19 pandemic not only pushed the S&P 500 and Nasdaq 100 higher, but also significantly affected assets with unbalanced positions.
Cyclical growth impulses and Federal Reserve policy expectations further strengthened market optimism. A UBS report shows that the cyclical index (vs. defensive index) is near all-time highs, reflecting the market's pricing of economic growth impulses. Investor confidence stems from the impending enactment of the Big Beauty Act and the passing of weak non-farm payrolls data.
Economic indicators do not point to a material slowdown in growth. In addition, Federal Reserve Chairman Powell's dovish signal for a September interest rate cut became a key driver. Investors "romanticized" the dovish Fed in the context of positive growth and encouraged maintaining risk positions. The report pointed out that attempts to short risk assets have repeatedly failed recently, highlighting the strength of the current environment.
Risks continue to accumulate
UBS highlighted negative seasonal risks in September, the worst month in SPX history. The market is already at historical highs, but seasonal factors usually intensify after mid-September, coinciding with the FOMC meeting, increasing the probability of a correction.
Specific risks include: AI leading stocks (such as Nvidia) may "rest" after the earnings report, resulting in a lack of momentum in the market; the risk of non-farm payroll data or CPI data being less than expected (the bank's economics team predicts non-farm payrolls in September will be 70,000, lower than the consensus of 75,000). Any reading that questions growth may trigger a sharp decline in U.S. stocks; the level of positions has reached the highest point since April, especially systemic funds, which can easily trigger systemic selling.
UBS's early warning signals are no longer bullish, indicating accumulation of downside risks, with models predicting an increased chance of the S&P 500 falling more than 5% over the next month.
hedging strategy
UBS recommends a cautious defensive approach. Given that price action was affected by low liquidity in late August (with many people on vacation), the bank recommends reducing exposure ahead of non-farm payrolls data. Specific strategies include: buying put options on the Russell 2000 Index (IWM.US) as protection against Friday’s data event; buying gold ETF October call options; and going long the software sector rather than the semiconductor sector because of Nvidia’s weakness.
